The Interaction between Lump - sum Aid and the Substitution Effect of Matching Aid

(Abstract) According to one theory, consumer-voters mistake the lump-sum aid for matching aid such that the former reduces their tax price of the aided service, generating the substitution effect. This flypaper effect is more likely when both lump-sum aid and matching aid (or equivalent tax-price reducing mechanisms) coexist and there is a high likelihood of interaction between the lump-sum aid and the substitution effect. This paper provides a formula to verify the substitution effect that interacts with lump-sum aid. This paper shows why the estimated flypaper effect, reported in the literature, is much larger than the fiscal impact of consumer-voters’ income.